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Jul 12, 2012, 08.23 AM IST
Sanjay Manyal of ICICI Direct expects FMCG stocks to performe in line with the market going ahead. Dabur and Marico are his top picks from this space.
Impact of VAT hike on tobacco products in Uttar Pradesh would have marginal impact on ITC 's demand, Sanjay Manyal of ICICI Direct told CNBC-TV18.
"Even after this increase of VAT, ITC is still very much stable in the sense of earnings visibility. I would say ITC is still a preferred stock despite the steep increase in the VAT ," he added.
Meanwhile he expects FMCG stocks to performe in line with the market going ahead. Dabur and Marico are his top picks from this space. "These companies would be able to sustain margins specifically when the crude prices have come down," he elaborated.
Below is the edited transcript of Manyal’s interview with CNBC-TV18. Also watch the accompanying video.
Q: Your take on ITC and after losing close to about 5% in the past two days does this news warrant more downside in ITC according to you?
A: No. I think government decision of increasing the VAT percentage from 17.5% to 50% would have a marginal impact as far as demand is concerned. What we understand UP contributes almost 5% to the total volumes of ITC, which should have some impact, but it would be marginal.
This year ITC could post positive volume growth. Though price increase or price led growth would be much higher compared with previous year, but we can see some marginal volume growth this year also.
Q: FMCG sector itself has been a rank outperformer in the past year or so. Does the outperformance continue or are you getting a sense that things have become a little stretched?
A: Though valuations are certainly expensive and these companies are trading at a rich valuations, so there is very less scope for the further increase in the valuation multiples. But earnings and sales growth will continue to be there. So the stock price movement will be inline with the growth, but there will not be any re-rating or valuation multiple increase from here onwards.
Q: So equal weight, performs with the market you are saying?
A: It will be performing with the market. Simultaneously, if you see other sectors outperforming then in that sense you can say that FMCG would underperform or relatively performance would be lower compared to other sectors. But I would say it would be a market performer.
Q: In the sector per se in individual stocks do you think one stock might perform better than the other, how would the pecking order be?
A: Even after this increase of VAT, ITC is still very much stable in the sense of earnings visibility. You probably have this steep increase in VAT, but when probably next year GST is rolled out these hurdles will go away. So you will not have differential VAT in every other state. I would say ITC is still a preferred stock despite the steep increase in the VAT.
Q: Any other preferences at all, any other buys in this space you have?
A: We will have Dabur. We are positive on Dabur. We are positive on Marico purely on the demand side. I think demand growth and volume growth will continue to be there. These companies would be able to sustain margins specifically when the crude prices have come down.
So there will be a less pressure from the costing front but there companies now would be more flexible in terms of increasing the advertisement expenditure. We are positive on Dabur, Marico.
Q: You don’t expect other states to follow up like we have seen in Rajasthan and now in UP as well to increase their VAT which would be a long term perhaps even a medium term negative on ITC?
A: Last year Rajasthan has increased VAT percentage and this year if you see UP has done that. But once GST is implemented, most of the state governments will prefer not to tinker with the VAT percentage. Anyway if GST comes then these all state level taxes will go. I don’t think any state governments would outrightly do any kind aof major changes in the VAT percentage.
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